Although it currently controls about $63 trillion in assets, most people are unaware of this type of finance, which sits somewhere between a regulated bank and a back-alley lender. According to S&P Global’s end-2022 estimate, that amount is nearly 78% of the world’s GDP. This is the kind of figure that ought to be in the news every week. Rather, it doesn’t for the most part. The entire purpose of shadow banking is, in part, to remain hidden.
Paul McCulley of PIMCO first used the phrase in 2007, shortly before the system he was referring to almost brought down the global economy. Although the term “shadow” has endured for obvious reasons, he intended it to be descriptive rather than derogatory. These organizations engage in bank-like activities, such as lending, short-term borrowing, and long-term investing, but they do not have a banking license or take deposits. Asset-backed commercial paper conduits, repo markets, money market funds, hedge funds, and structured investment vehicles. Even though they don’t really move the trillions, payday lenders and pawn shops are housed in the same large tent.
| Item | Detail |
|---|---|
| Sector Name | Shadow Banking System (also called market-based finance) |
| Estimated Size (end-2022) | About $63 trillion in financial assets |
| Share of Global GDP | Roughly 78% |
| Term Coined By | Paul McCulley of PIMCO, at the 2007 Jackson Hole symposium |
| Key Entity Types | Hedge funds, money market funds, SIVs, repo markets, mortgage companies |
| Largest Markets | United States, Canada, China |
| US Loans to Shadow Banks (2024) | Over $1 trillion |
| Notable Crisis Link | Subprime mortgage crisis of 2007–2008 |
| Primary Global Regulator | Financial Stability Board |
| Common Products in China | Trust products, wealth management products (WMPs) |
The idea that shadow banking is distinct from the regulated financial system is alluring. It isn’t. Traders, attorneys, and structurers whose sole responsibility is to keep certain assets off the balance sheet can be found in any major investment bank in Manhattan, Frankfurt, or Hong Kong. The biggest shadow banks are, in fact, regulated banks conducting shadow business through affiliated vehicles and subsidiaries, according to a former BIS official. When the sector is framed as a parallel universe in policy discussions, that detail is often overlooked.
The numbers have changed in intriguing ways. The US shadow system was estimated by the Financial Stability Board to be worth approximately $25 trillion in 2007; by 2011, that estimate had dropped to $24 trillion. Before the crisis, the eleven largest national systems in the world totaled roughly $50 trillion; by late 2011, they had fallen and then risen above their pre-crisis peak. The FSB was using a $100 trillion estimate by 2016. In 2012, some scholarly estimates were already available. The direction is clear regardless of the number you trust.
The most peculiar piece of the puzzle is China. There, the 4 trillion yuan stimulus that followed the 2008–09 crisis gave rise to shadow banking, which now focuses on wealth management and trust products that are promoted as deposit substitutes. It is not appropriate for investors to believe that their returns are assured. In any case, they assume it. Researchers examining the system have demonstrated that when Beijing tightened regulations regarding implicit guarantees in 2018, non-state companies’ access to credit became noticeably more difficult. This is the kind of unintended consequence that regulators rarely take pride in.
It’s difficult to ignore how much of this depends on faith when observing it from a distance. trust that money market funds will bear the responsibility. Have faith that tomorrow, repo lenders will roll over their loans. trust that any losses will be covertly covered by the bank sponsoring the trust company or the trust company sponsoring your wealth product. When that faith crumbled in 2008, everyone was reminded of Bear Stearns and Lehman. What mattered was the plumbing that failed beneath them.
When US financial institutions’ loans to non-bank lenders surpassed $1 trillion in 2024, it should have generated more conversation than it did. Depending on who you ask, that could be a slow-building risk or prudent diversification. Speaking with people in the field gives me the impression that everyone is aware that the system is larger than its supervisors can truly perceive. It’s still unclear whether the next stress test will come from a Chinese trust, a private credit fund, or something that hasn’t been named yet. There seems to be no doubt that the shadow continues to expand.